U.S. Commodity Futures Trading Comm'n v. Jonathan W. Arrington, Elite Mgmt. Holdings Corp.

• Decision Date: 16 April 2014
• Docket Number: Case No. 8:11CV181.
• Citation: 998 F.Supp.2d 847
• Court: U.S. District Court — District of Nebraska
• Parties: U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. Jonathan W. ARRINGTON, Elite Management Holdings Corp., MJM Enterprises LLC, Michael B. Kratville, and Michael J. Welke, Defendants.

998 F.Supp.2d 847

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,

v.Jonathan W. ARRINGTON, Elite Management Holdings Corp., MJM Enterprises LLC, Michael B. Kratville, and Michael J. Welke, Defendants.

Case No. 8:11CV181.

United States District Court, D. Nebraska.

Signed Jan. 28, 2014.

Order Denying Motion for Relief from Judgment April 16, 2014.

Charles D. Marvine, Christopher A. Reed, Margaret P. Aisenbrey, U.S. Commodity Futures Trading Commission, Kansas City, MO, for Plaintiff.

Michael B. Kratville, Kratville Law Firm, Omaha, NE, for Defendants.

Michael J. Welke, Omaha, NE, pro se.

MEMORANDUM AND ORDER

LAURIE SMITH CAMP, Chief Judge.

This matter is before the Court on the Motion for Summary Judgment (Filing No. 97), filed by the Plaintiff, U.S. Commodity Futures Trading Commission (“CFTC”) against Defendant Michael B. Kratville. For the reasons stated below, the CFTC's Motion for Summary Judgment will be granted.

BACKGROUND

The CFTC filed its Complaint on May 23, 2011 (Filing No. 1) alleging that Defendants Jonathan Arrington (“Arrington”), Michael B. Kratville (“Kratville”), Michael J. Welke (“Welke”), Elite Management Holdings Corp. (“EMHC”), and MJM Enterprises LLC (“MJM”) (collectively “Defendants”) fraudulently induced more than 130 individuals to invest $4.7 million in commodity pools operated by Defendants, in violation of the Commodity Exchange Act (the “CEA” or the “Act”), 7 U.S.C. § 1 et seq., and its implementing regulations, 17 C.F.R. § 1.1 et seq. 2.

The facts below are admitted by the parties, or are stated in the briefs and supported by pinpoint citations to admissible evidence in the record and not properly resisted as required by NECivR 56.1 ¹ and Fed.R.Civ.P. 56.

I. Origin of Elite Investment Group

In or around 2004, Kratville and Welke were members of an “investment club” run by Arrington and Neil Labelle (“Labelle”), called Elite Index Investment Group. Through a $25,000 investment in January 2004, Kratville joined Elite Index Investment Group, which was incorporated in February 2004, and began trading, as early as September 2003. Elite Capital Management Group, LLC, operated Elite Index Investment Group and another “investment club,” Elite Aggressive Growth Group, established in February 2004. At some point during the summer of 2005, Labelle assigned Elite Index Investment Group and Elite Aggressive Growth Group to Arrington. At that time, some or all members received their funds back. Kratville got his money back in May 2005, receiving slightly less than he invested, because his Elite Index Investment Group investment resulted in a loss. Neither Elite Aggressive Growth Group nor Elite Index Investment Group showed consistent profitability.

II. FXIG

FXIG was a trading group, run by Fred Honea (“Honea”) in Spain, that reported monthly trading returns ranging from 8.6% to 34.6% per month from May 2002 through May 2005. FXIG reported that it traded in the spot and futures markets for commodities, precious metals, and foreign exchange (“forex”), and that it operated as a pool so every account's return would be the same. FXIG promised high returns with limited risk because no more than ten percent of an individual's funds would be invested at any one time.

Kratville learned about FXIG from his friend Steven Vlach (“Vlach”). After Kratville learned about FXIG, he invested by sending $10,000 to $15,000 to Vlach. FXIG moved money from Vlach's account to create at least one account for Kratville. When Vlach talked to Kratville about FXIG, he cautioned him, stating he should get his original money out as soon as he doubled his money—because funds like FXIG can go awry or do really well and then hit a snag. Kratville later introduced Arrington and Welke to FXIG. In or around July or August 2005, Arrington, Kratville, and Welke traveled to Las Vegas to meet Honea and learn more about FXIG. Arrington, Kratville, and Welke never saw any trading statements because Honea refused to show them.

III. Background of “Elite” Companies

Arrington, Kratville, and Welke formed Defendant Elite Management Holdings Corporation (“EMHC”) in July or August 2005, to pursue investment opportunities, and they decided to invest with FXIG. Kratville, Arrington, and Welke were all equal owners of EMHC, and they were all officers; with Kratville serving as secretary. EMHC became the holding or parent company for the two pools assigned from Labelle to Arrington—Elite Index Investment Group and the Elite Aggressive Growth Group (the “Elite Pools”). In or around January 2006, Kratville, Arrington, and Welke also opened Elite Management Index Fund (“EMIF”), managed by EMHC.² Neither Arrington, Welke, nor Kratville registered EMHC with the CFTC as a commodity pool operator, nor did they register individually as associated persons of a commodity pool operator. EMHC never registered or filed an exemption of registration with the CFTC.

The Elite Pools had target return structures that capped the returns to which an individual pool participant would be entitled in a given month. Arrington, Kratville, and Welke were to keep all returns above the monthly caps, and all business expenses were to be borne by them. The returns were to be made by investing in FXIG.

Kratville had several roles in EMHC. When a prospective pool participant appeared interested in investing, Kratville referred the name to Arrington. Kratville, Arrington, and Welke communicated with each other about whom they were contacting to invest with the Elite Pools. Kratville was originally a signatory on at least two bank accounts for EMHC, but Arringtonremoved Kratville as a signor for the accounts as of December 27, 2006.

Kratville also acted as the attorney for EMHC and the Elite Pools, and appeared before the Nebraska Department of Banking and Finance (“NDBF”) in that capacity. Kratville had input into the decision to use FXIG; identified prospective pool participants; and spoke with potential pool participants about investing in the Elite Pools. Kratville reviewed and contributed to the Elite Pool website, brochure, prospectus, and monthly newsletter called “eWires,” when they were used to solicit prospective pool participants. Kratville used both telephones, mail, and emails to communicate with Arrington, Welke, prospective pool participants and pool participants about EMHC and the Elite Pools, and helped pool participants access the Elite Pools' website.

IV. Solicitation of Elite Pool Participants

In August 2005, Kratville began to provide information about the Elite Pools to prospective pool participants, including family and friends. That month, Kratville emailed at least two prospective pool participants, telling them that he formed an investment company that would pay people 4–6% per month “because of the ability of our trader to generate consistent profits of at least 6% every month since 2002.” (Filing No. 100–5 ¶ 4; Filing No. 102–6 at ECF 12.) Kratville provided the prospective pool participants with a link to the EMHC website and stated, “I have been a part of this fund since 2002” and “expect to hit the 6% mark again by the end of the month ... for the 40th month in a row.” (Filing No. 100–5 ¶ 4; Filing No. 102–6 at 12.) Neither Kratville's email nor the EMHC website referenced FXIG.

In the months following August 2005, Kratville represented to prospective pool participants that the Elite Pools had returned at least four to six percent per month for several months. Kratville noted that there was a risk with the investment, but stated that the risk was limited because only a small portion of the fund was invested at any time. The Defendants did not mention any association with FXIG. Their website also stated that only a portion of the fund was invested at any time.

Kratville followed up with one of his clients, Ed Voges (“Voges”), several months after making representations to prospective investors. In his emails to Voges, Kratville stated, “We have hit at least 6% every month since 5/02 ... and we don[']t get paid unless we hit your goal level first, and we charge no fees.” (Filing No. 100–5 at ECF 14.) Kratville also stated, “We are an investment club exempt from the SEC rules ... so no filings.” ( Id. at ¶ 3, ECF 20.) Kratville stated “our main clients are people in our age group with IRAs and 401 ks that can be rolled over into our fund and where people are looking to let it grow for a minimum of 3 years. We accept cash, of course, but we feel we do the most good for people that roll[ ] over tax-deferred vehicles.” ( Id. at ECF 16.)

Although the EMHC website did not mention FXIG, the EMHC website and marketing materials adopted FXIG's trading strategy as its own. The EMHC website made several representations about its trading record and strategy stating, “Our Executive Trader and trading group designed our Special Growth Strategy over a 10+ year[s] of testing and trading. The principal investment markets that this strategy utilizes are equities, commodities, precious metals and currencies.” (Filing No. 102–2 at ECF 3.) The website also stated that this strategy has “had many multi-million offers to buy the system, but the desire has been, and still is to help the small guy build a nest egg and to remain entirely proprietary.” ( Id.) The website advertised that EMHC's “Special Growth Strategy” used “sophisticated procedures to prevent losses.” ( Id.) Specifically, the website explained, “No more than 10% of principal is invested at one time, yet the results are unparalleled.” ( Id.) The website stated that the investment goal was a 4, 4.5, or 5 percent monthly-capped return, compounded monthly depending on the principal investment. The website touted, “Over the last 48 month[s] this strategy has met it[ ]s return goals every month.” ( Id.)

Kratville forwarded the monthly newsletter eWire to potential pool participants to see if they were interested in the pool. The newsletters included representations about the trading returns,...